Growth model threatened by crisis

Exploding global financial crisis threatens country’s key industries.

Peru´s economy has grown at a breakneck pace, expanding for nine consecutive years. The economy is expected to grow 9 percent this year, repeating the same astronomical growth as last year, one of the highest rates in the region.

Despite the snowballing international economic crisis, the government says Peru is prepared to face the consequences, citing solid economic fundamentals, another illusion behind which may signal that Peru is experiencing the calm before the storm.

The country´s economy depends almost one-third on minerals exports and falling global demand could have a major impact.

Foreign investment has poured into the economy over the past decade, especially in extractive industries such as mining and energy, but the slowdown could have a direct impact on this.

In an Oct. 9 report, the Council on Hemispheric Affairs (COHA), a Washington-based think tank, said the government has not addressed these concerns in a “constructive manner.”

“The impending global economic slowdown could cause foreign investment in the country to dry up, destroying jobs and crippling Peru’s economic growth,” it said.

An island of calm
Peru’s government, and President Alan García in particular has tried to portray the country as an island of calm amid the crisis, marketing it as a safe destination – one of the only ones in the world – for foreign investment and other business.
But the very development model the country has followed may be the cause of domestic financial turbulence.

Peru easily passed a free trade agreement with the United States in 2006, a pact that was approved by US lawmakers late last year. Peru has also aggressively been pursuing free trade deals with Singapore, South Korea, and giant market China. A deal with Canada was signed earlier this year.

Government officials argue that these deals are necessary for Peru’s economic growth.

But a continuation of the export-based development model puts the country at increasing risk amid the growing economic downturn and dwindling demand.

“While the global food crisis continues to drive up prices of staples like eggs and bread, more consumers are questioning the rationale behind opening up fragile domestic markets to subsidized US produce instead of producing food domestically,” said COHA in its report.

Peruvian economist Oscar Ugarteche, based at the National Autonomous University Mexico (UNAM), says that since exports to the US are dropping, Peru might be greater protected against the crisis, and not totally dependent on the crisis stemming from that country.

“This is a US crisis that will affect those tied closest to the United States,” he said. “Fortunately, the weight of the [United] States is less on a whole of the exports and we expect it to get even less.”

Unhappy at home
But unrest is already starting at home. Garcia´s government has been faced with several protests this year, all tied to frustration over either inflation or his administration´s failure to increase the distribution of wealth. His popularity rates are at their lowest point since he took office in July 2006.

Some 2,000 people on Oct. 7 protested increasing corruption in García´s government and the financial crisis.

“As the president continues to lose legitimacy and popular unrest surges, fewer and fewer Peruvians are accepting the notion that the global free market will increase their odds of gaining prosperity,” said COHA´s report.